Bernanke: USD volatility is the only guaranteed outcome

The British pound has enjoyed a solid advance against the US dollar in the wake of today's MPC surprise.

Now the direction of the GBP-USD is dependent primarily on the USD and the response of traders to Bernanke's much-hyped testimony to Congress.

A number of analysts we follow consider the likely response of the US dollar below.

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Stephen Gallo at BK Asset Management:

"The angle or approach to Bernanke we’re adopting today is that his comments will, overall, seek to balance the two opposing sides of the QE tapering debacle we’ve seen thus far: the “hawkish” side and the “dovish” side.  

"If Bernanke seeks to keep market participants on the QE tapering path whilst anchoring rates below their recent peaks at the same time (i.e. confirmation that the first round of QE tapering adjustment is basically done), we believe this will be moderately USD positive for the week as a whole, but not enough to set us up for an immediate test of t he 85.00 mark just yet.  

"The best chance USD/JPY has to undergo a grind higher towards 101.00 over the balance of the week is if Bernanke manages to keep the US 10-year yield fairly tight within a narrow range whilst encouraging equity markets to move higher.

Shaun Osborne at TD Securities:

"Considering the USD’s selloff since Bernanke’s last remarks a week ago, expectations have clearly built that he will re-iterate a more dovish tone—emphasising the data dependency of QE tapering, and that policy will remain accommodative for the foreseeable future.

"In our opinion, the import of today’s should generally reflect the message the Fed has been pushing recently—tapering is possible this year if the economic data hold up but a tightening of monetary policy remains a long way off.

"We continue to lean more bullishly towards the USD but reaction to the headlines will be what counts today."

Kathy Lien at BK Asset Management:

"Taking a flexible approach to his speech on Capitol Hill is a smart and expected tactic.  Bernanke needs to appear flexible to Congress and willing to respond to incoming data and adjust the asset purchases as necessary.

"When the testimony officially begins at 10am ET and members of the House Financial Services Panel start to question Bernanke's plans, traders can expect more volatility in the dollar."